Mergers and Acquisitions and Managerial Commitment to Innovation in M-Form
Firms
Michael A. Hitt; Robert E. Hoskisson; R. Duane Ireland
Strategic Management Journal, Vol. 11, Special Issue: Corporate Entrepreneurship. (Summer,
1990), pp. 29-47.
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Strategic Management Journal, Vol. 11, 29-47 (1990)
MERGERS AND ACQUISITIONS AND MANAGERIAL
COMMITMENT TO INNOVATION IN M-FORM FIRMS
MICHAEL A. HlTT and ROBERT E. HOSKISSON
College of Business Administration, Texas A&M University, College Station, Texas,
U.S.A.
\
R. DUANE IRELAND
Hankamer School of Business, Baylor University, Waco, Texas, U.S.A.
Acquisitive growth has beconze a high1-y popular strategy in recetzt years. Thus, nzore
attetztiotz has been focused on its outcomes. This paper presents theory suggestitzg a tradeoff between growth by acquisition and managerial cotnmitnzetzt to itznovation. The nzodel
developed herein proposes that the acquisition process, atzd the resulting conditions after
the acquisition is consummated, affect nzanagerial commitment to innovation. Specijically,
the extent to which acquisitions serve as a substitute for itznovation, energy and attention
required during negotiations, itzcreased use of leverage, increased size, atzd greater
diversijicatiotz may affect nzanagers' Lime and risk orientations. Because of these effects,
nzanagers may reduce their comnzitment to innovation. The implications of the relationships
specijied itz the model are also examined.
INTRODUCTION
Large diversified firms have increasingly pursued
growth through mergers and acquisitions. Pitts
(1977) suggested that internal growth and growth
through acquisitions were equally attractive alternatives. More recently, Lamont and Anderson
(1985), using a random sampling procedure,
found that large multibusiness firms are placing
a stronger relative emphasis on the strategy
of acquisitive growth. Similarly, Porter (1987)
examined 33 large firms and found that these
firms had diversified their operations more
through acquisitive growth than through alternative means. However, Porter (1987) discovered
that acquisitions often resulted in unsatisfactory
performance that in turn led to a large number
of post-acquisition divestitures. Roll suggested
that gaim achieved through acquisitions or
takeovers 'may have been overestimated if they
exist at all' (1986: 198).
Although there is some evidence to the contrary
(e.g. Jensen, 1988), the mostly neutral and
0143-20951901050029-19$09.50
01990 by John Wiley & Sons, Ltd
sometimes negative results achieved by the
acquiring firm indicate that mergers and acquisitions involve trade-offs. For example, Fowler
and Schmidt (1989) found that performance
declined after a tender offer acquisition (using
both accounting and stock market measures).
However, this general decline could be improved
by previous acquisition experience and affected
by percentage of ownership and firm age. Hopkins
(1987) found that acquisitions often led to a
decline in market position. Mueller (1985)
reported that companies acquired in conglomerate
and horizontal acquisitions experienced substantial losses in market share. Another trade-off is
demonstrated by Pitts' (1977) results showing
that firms following an acquisitive strategy
invested less in R&D than did internal growth
firms.
This paper presents theory suggesting a tradeoff between growth through acquisitions and
managerial commitment to innovation in the
acquiring firm. Commitment to innovation is
defined as managerial willingness to allocate
30
M. A . Hitt, R. E. Hoskisson and R, D. Irelund
resources and champion activities that lead to
the development of new products, technologies,
and processes consistent with marketplace opportunities. For an industry or economy it may be
argued (from the financial market perspective,
Jensen, 1988) that acquisitive takeovers have
facilitated the rational restructuring of corporate
assets, resulting in an increase in firms' competitiveness. Additionally, Lubatkin (1988) noted
that mergers combining related business units
may reduce risk and produce greater shareholder
value. Nonetheless, an individual firm may incur
negative consequences because of its acquisitive
activity.
The model presented in Figure 1 suggests that
the relationship between firm growth through
acquisitions and managerial commitment to innovation is complex. First, the acquisition process
has direct effects on managerial commitment to
innovation. A significant direct effect includes
the use of acquisitions as a substitute for
innovation because of the risk in pursuing
innovation and trade-offs in resource allocations.
Another direct effect is the amount of managerial
energy absorbed by the acquisition process. Such
absorption results in a lower propensity for other
managers within the firm to pursue risky projects
that require the support of top-level managers
whose energies are directed primarily toward the
acquisition process. A third direct effect is the
increased debt levels that often are necessary to
finance acquisitive growth (Michel and Shaked,
1985). As debtholders gain power relative to
other stakeholders, the acceptability of pursuing
risky projects may decrease. This outcome may
occur because debtholders are usually more riskaverse than equity or stockholders (Smith and
Warner, 1979; Williamson, 1988).
There are also certain attributes of a firm that
tend to change when a merger or an acquisition
is completed. These attributes, which affect
managerial commitment to innovation, are related
to the way the newly combined firm is managed.
Included among these attributes are firm size.
level of diversification, and the organizational
control systems that they produce. Almost by
definition, firms pursuing growth through acquisitions become larger and the range of their
operations may become more diversified. In turn,
increasing size and diversification affect the types
of control systems that are used within the
acquiring firm following an acquisition.
For instance if, through acquisitions, a firm
continues to diversify beyond its center of gravity
(Galbraith and Kazanjian, 1986) or beyond the
ability of its managers to control the firm's
operations (Hill and Hoskisson, 1987), the
indirect result may be loss of strategic control.
(+)
AND
Figure 1. Effects of mergers a n d acquisitions on managers' commitment t o innovation in the acquiring firm
Mergers a n d Acquisitions and Managerial Commitment t o Innovatiorz
That is, managers may find that they are
attempting to compete in a business that they do
not understand fully. Furthermore, managers
may find their ability to manage is bounded by
the information-processing requirements in the
firm's new competitive markets. In such instances,
managers may substitute financial evaluation
criteria for strategic criteria. These substitutions
occur because managers may not have the
expertise required to process richer strategic
information (financial criteria require less information processing). Acquisitive growth may also
increase firm size to a level that necessitates
reliance on more formalized, bureaucratic controls. In combination, larger size and increased
diversification may affect managers' ability to
control current operations.
These various effects of mergers and acquisitions on managerial commitment to innovation
are depicted in Figure 1, and are examined in
detail in the remaining sections.
TRADE-OFFS AND MANAGERIAL
ENERGY ABSORPTION
In the popular business literature it is argued
that often, after acquisitions, resources allocated
to an acquired firm's research and development
projects are reduced or, in some cases, eliminated
(e.g. Siwolop, 1987). Proponents of this view
suggest that these actions are taken partially
because of trade-offs that occur. For example,
acquisitions may serve as a substitute for innovation. Additionally, investment in R&D may be
reduced in order to increase short-term profits
to pay for debts and related costs incurred in
completing an acquisition (Clark and Malabre.
1988).
Acquisitions as a substitute for innovation
Perceived risk affects the relationship between
acquisitive growth and commitment to innovation.
Internal development may be perceived by
managers to entail high risk because of the low
probability of innovation success and the length
of time required for innovation to provide
adequate returns (Clark and Malabre, 1988;
Biggadike, 1979). Biggadike (1979), for example,
found that new ventures require an average of 8
years to achieve profitability and 12 years to
31
generate adequate cash flows. Based on this
evidence, he concluded that new, internal ventures were very risky. Mansfield (1969) and Hill
and Snell (1989) agreed with the high risk of
internal development because of the large failure
rate of innovations. Mansfield estimated that up
to 88 percent of innovations fail to achieve
adequate returns on investment. Consistent with
this position, Hill and Snell argued that although
innovation was in the best interests of, and
preferred by, stockholders, managers bear the
consequences of its failure. Thus, top-level
managers prefer to invest fewer resources in
internal development (e.g. R&D) when faced
with resource constraints or when other attractive
investment alternatives exist.
Acquisitions may serve as an attractive alternative to investment in R&D because they offer
immediate entrance to a new market and/or a
larger share of a market served currently by the
firm (Balakrishnan, 1988; Shelton, 1988). While
risk does exist, the outcomes are more certain
and can be estimated (or forecasted) more
accurately with acquisitions than with internal
development. Constable (1986) argued that acquisitions have become a common means of avoiding
risky R&D expenditures.
Furthermore, Burgelman (1986) suggested that
firm growth and development can be achieved
through either acquisitions or innovations. I-Towever, because of resource constraints. most firms
emphasize one or the other approach. For
example, acquisitions often require significant
resource commitments resulting in fewer
resources to invest in other strategies. Therefore,
acquisitions may serve as a substitute for innovations, particularly when resources are inadequate to pursue both acquisitive growth and
internal development strategies. Interestingly,
once managers begin to purchase innovations by
acquisition, their commitment to this approach
tends to escalate over time because internal R&D
competency is likely to be reduced. Again, this
is especially true when resources are scarce. Thus,
the evidence suggests the following hypothesis:
Hypothesis l a : There is a positive relationship
between a strategy of acquisition artd managerial
risk aversiorz and the amount of resources
uiiocated to acquisifiorz.
Hypofhesis 1 b: Tizere is a negative relationship
between managerial risk aversiorz and the
M . A. Hitt, R. E. Hoskisson and R. D. Ireland
32
amounr of resources aIIocated to acquisitions
and managerial commitment to innovation.
Hypothesis 2b: There is a rzegative reIatiorzship
between the acquiritzg firm's level of debt and
managerial commitment to innovation.
Debt
Often the need for substantial resources to
complete acquisitions requires that firms resort
to the use of debt. As noted previously, firms
may trade off payment of debt and debt costs
for investments in R&D. This argument is
supported in the empirical literature. Constable
(1986), for example, concluded that diversification by acquisition diverts investments from
internal development. Michel and Shaked (1985)
found that firms acquiring an unrelated business
employed more leverage than other types of
firms. These firms increase diversification to
reduce their business risk, but greater amounts
of leverage increase financial risk. Thus, these
firms often reduce costs to decrease their financial
risk, thereby using the increased returns to pay
debt costs and reduce overall debt.
Myers (1984) concluded that lack of capital
and an avoidance of risk form major barriers to
innovation. A lack of internal capital or access
to increased equity capital forces firms to employ
additional leverage. Williamson (1988) proposed
that debt operates largely through a set of strict
rules. He suggested that these rules impose higher
costs for risky projects where the assets involved
are not redeployable for other purposes. The
creation of innovation through R&D involves
assets that are largely non-redeployable, suggesting that such activity is unlikely to be financed
with debt. Thus, there may be a preference to
use debt to fund acquisitions rather than to
support R&D activities. This tendency exists
because of a perception of less risk with
acquisitions and a belief that such resources are
invested in assets that are, for the most part,
redeployable. Thus, increased leverage is likely
to lead to greater risk aversion. This conclusion
is supported by Baysinger and Hoskisson (1989),
who found a negative relationship between levels
of long-term debt and R&D expenditures after
adjusting for firm size. It appears, then, that
increasing levels of debt may produce managerial
risk aversion, and in turn, a reduced managerial
commitment to innovation, suggesting the following hypotheses:
Hypothesis 2a: There is a positive relationship
between a strategy of acquisition and the
acquiring firm's level of debt.
Managerial energy absorption
The acquisition process often absorbs significant
amounts of managerial energy and time, thereby
diverting attention from other important matters.
Acquisitions require extensive preparation and
sometimes laborious negotiations. Firms following
an active strategy of acquisitions conduct searches
for viable acquisition candidates involving extensive data-gathering and analyses. Although executives generally are not involved in the datagathering and analyses, they must review all of
the data and narrow the list of candidates.
Furthermore, they must select the acquisition
target(s) and formulate an effective acquisition
strategy. Once this is accomplished, negotiations
begin. The negotiations alone can consume
considerable time, particularly if the acquisition
involves an unfriendly takeover. However, even
friendly takeovers require an agreement among
parties concerning a range of meticulous details.
This process, then, demands much attention and
energy on the part of executives (from both the
acquiring and acquired firms). Often, during this
process, managers' attention is diverted from
other internal matters, frequently those that are
important and long-term in nature. Thus, during
the acquisition process, and more so in the final
stages (selection of target, merger negotiations,
etc.), top-level managers' attention and energy
are devoted largely to the successful conclusion
of the acquisition. Obviously, then, they must
continue to make important operational decisions
(short-term) or delegate them.
Much energy and attention is also required
of the executives in the target firm as well.
Frequently, operations in target firms that are
being pursued vigorously for acquisition operate
in a state of virtual 'suspended animation'. Daily
operations continue in the target firm but
decisions requiring long-term commitments are
often postponed pending outcome of the merger.
In fact, managers in the target firm generally are
reluctant to make long-term commitments of
resources (e.g. R&D expenditures) unless they
do so for defensive purposes (e.g. to reduce the
firm's cash position, having the effect of making
the firm less attractive as an acquisition
candidate). Walsh (1989) and Hirsch (1986)
Mergers and Acquisitiorzs and Managerial Commitment to Innovation
argued that target firm managers involved in such
deals often experience job loss and reputation
'wounds'. Therefore the process of acquisition
creates a short-term perspective and heightened
risk aversion among the top-level managers of
both the acquiring and target firms. The effects
of higher debt and managerial energy absorption
resulting from an acquisitive growth strategy are
shown in Figure 1.
Once the merger is completed, the process of
post-merger integration becomes critical (Fulmer
and Gilkey, 1988; Perry, 1986; Shrivastava, 1986;
Sales and Mirvis, 1984; Lindgren and Spandberg,
1981). It has been estimated that almost one-half
to two-thirds of all mergers simply do not work
(Business Week, 1985c), and that one-third of all
merger failures are caused by faulty integrations
(Kitching, 1967). Ravenscraft and Scherer (1987)
conservatively estimated that one-third of all
acquisitions completed in the 1960s and 1970s
have been divested. These facts suggest that
managers must devote time and energy to
assimilate successfully an acquired firm, resulting
in the following hypotheses:
Hypothesis 3a: There is a positive relatiorzship
between a strategy of acquisitiorz and the amount
of time and energy managers devote to the
acquisition process.
Hypothesis 3b: There is a negative relationship
between the amount of time and energy
managers devote to the acquisition process and
their commitment to innovation.
Once the acquisition has been completed successfully, and the merged firms integrated, effective
management of the newly formed firm becomes
critical. As a result, the effects of increased size
and diversification become important issues for
top-level managers.
MANAGING LARGE DIVERSIFIED
FIRMS
Acquisitions produce larger firms, often resulting
in additional degrees of diversification. As Figure
1 denotes, in larger and more diversified firms
top-level executives search for means to exert or
maintain organizational control. Recent evidence
proposes that, when faced with increased amounts
of diversification, executives make trade-offs
33
between strategic and financial controls
(Hoskisson and Hitt, 1988). In more focused
organizations-that
is, those that are not highly
diversified (e.g. a dominant business firm)strategic controls are the primary means of
control that are used. In contrast, financial
controls are emphasized in more diversified (e.g.
unrelated business) firms. In addition, reliance
on formal behavioral controls increases in large
firms (Mintzberg, 1979). In contrast, smaller
firms rely more heavily on informal behavioral
and procedural controls.
Figure 1 illustrates three types of controls used
in managing large diversified firms: strategic,
financial, and formal behavioral (or bureaucratic)
controls. These controls are used to different
degrees within the multidivisional structure (Mform) (Williamson, 1975), a structural form used
by firms as growth and diversification occur. This
structural form is common in firms that grow
through acquisition (Salter and Weinhold, 1978).
The M-form has several unique features, including: (1) establishment of a division for each
distinct business; (2) decentralization of responsibility for operating each division; and (3) centralization of strategic and financial controls and
resource allocations in the corporate office.
Strategic controls refer to the ability of toplevel managers to use strategically relevant criteria
when evaluating plans and competitive intentions
proposed by business unit managers. Gupta
(1987) suggests that these controls emphasize
more subjective and sometimes intuitive criteria
to evaluate business unit manager performance.
Financial controls refer to an emphasis on
objective performance criteria used by top-level
managers when evaluating the performance of
business unit managers. These criteria are made
possible in the M-form by having separate
divisions or business units, permitting a strict
application of these criteria and eliminating
the need to rely on more subjective controls.
However, the use of financial controls becomes
more problematic as the degree of interdependence across business units increases (Jones and
Iiill, 1988; Hill and Hoskisson, 1987; Thompson,
1967).
Bureaucratic controls refer to actions that
formalize authority and reporting relationships
such that procedures become standardized and
result in predictable behaviors. With respect to
managerial levels, bureaucratic controls refer to
planning, budgeting, and auditing procedures and
34
M. A. Hitt, R. E. Hoskisson and R. D. Ireland
responsibilities to structure managerial actions so
that predictable outcomes are achieved. At lower
levels these controls result in formalization of
role behaviors.
All organizational controls affect managerial
commitment to innovation and, eventually, firm
performance. In general, financial controls and
formal bureaucratic or formal behavioral controls
tend to lower managers' commitment to innovation (Baysinger and Hoskisson, 1989; Hlavacek
and Thompson, 1973, 1978). In contrast, the use
of strategic and informal behavioral controls
tends to increase managerial commitment to
innovation (see Figure 1). The literature suggests
that the form of organizational control may vary
by the size and diversification of the firm (cf.
Hoskisson and Hitt, 1988).
Diversification
The body of research that examines the relationship between diversification and R&D expenditures as a measure of managerial commitment to
innovation shows conflicting results. It is argued
herein that this research can be understood
more clearly by examining how increases in
diversification are managed through organizational controls.
Clearly, executives have incentives to pursue
diversification through acquisitions. The notion
that increasing diversification reduces the firm's
overall risk is well accepted in the popular
literature. Reductions in overall risk also diminish
a CEO's employment risk (Hill, Hitt, and
Hoskisson, 1988; Amihud and Lev, 1981). Thus,
although recent evidence raises questions about
the actual risk reduction properties of diversification (Lubatkin and O'Neill, 1987), it has been
a popular strategy for several years.
One important reason for the popularity of
diversification is that it allows a firm to acquire
technology that is new to the firm but is not new
to the market. In turn, however, the acquisition
of a new technology may reduce the incentive to
allocate the resources necessary to develop
new technologies within the firm. The research
literature, however, includes conflicting results
on this issue.
For example, Kelly (1970) found that larger
investments in research and development were
made in diversified firms as compared to less
diversified firms. But additional evidence from
Kelly's study suggested that the advantages of
diversification for research and development
activities occur primarily for technically related
products being offered within the same industry.
Thus, one may conclude that related diversification should produce positive investments in
R&D, resulting in greater innovation. Unfortunately, the relationships are not that simple. For
example, R&D-intensive firms tend to diversify
into other R&D-intensive industries (MacDonald,
1985; Stewart, Harris, and Carleton, 1985; Wood,
1971). However, R&D-intensive firms may not
remain intensive after diversifying acquisitions.
Although Eckbo (1985) argued that horizontal
acquisitions did not decrease competition, Jaffe
(1986) and Cartwright, Kamerschen, and Zieburty
(1987) found that related acquisitions did reduce
competition. Jaffe (1986) also concluded that
lower competition reduced incentives to innovate.
Eiamilton and Lee's (1985) results, indicating that
vertical acquisitions also reduced competition,
support Jaffe's (1986) arguments. These findings
are in contrast to Schumpeter's (1961) proposition
that monopolies (also oligopolistic firms) should
be the most efficient producers of innovation.
However, Brock (1983) found that having a
monopoly mitigated against innovation. He noted
the example of Eastman Kodak which decided
belatedly to enter the markets for cartridgeloading and subminiature amateur photography.
This decision was reached in spite of the fact
that the technology, pioneered by others, had
been available for decades.
Kamien and Schwartz (1982), on the other
hand, argued that a firm operating in a business
that has been defined narrowly may be unwilling
to produce and market a new product idea, from
R&D activities, if that idea is unrelated to the
firm's core business. They suggested that a more
highly diversified firm may be better able to
utilize (and thus profit from) serendipitous
innovations, and concluded that if such profits
are expected these firms may become more
R&D-intense. Jose, Nichols, and Stevens (1986)
argued that diversification may have major effects
on performance but that firm R&D intensity is
related largely to the level of industry R&D
intensity. Furthermore, Lunn and Martin (1986)
did not find a significant relationship between
diversification and R&D activity. Finally, Scherer
Mergers and Acquisitions and Managerial Commitment to Innovation
(1965), and Johannisson and Lindstrom (1971)
were not able to discern a relationship between
level of diversification and number of patents.
Recently, Hoskisson and Hitt (1988) found,
after controlling for industry and organizational'
size, that the amount of R&D intensity differed
by level of diversification. Hoskisson and Hitt
(1988) and Baysinger and Hoskisson (1989) found
relative R&D expenditures to be lower in highly
diversified firms as compared to less diversified
firms. Viewed together, these results suggested
that dominant business firms invest more in R&D
relatively than do related or unrelated business
firms. Hoskisson and Hitt (1988) concluded that
these outcomes result largely from the different
control systems necessary to manage the level of
diversification.
Control systems may also change because the
diversifying acquisitions can be designed to
produce a change in the firm's 'center of gravity'.
According to Galbraith and Kazanjian (1986), a
firm's center of gravity is established by starting
operations in a specific industry at a particular
stage in the product market stream. Each industry
has specific, and often different, critical success
factors. As such, the firm and its managers'
values, operational systems, and strategies are
shaped by this center of gravity. The center of
gravity rarely changes rapidly. Strategic changes
may occur around the center, but the center itself
often remains stable. However, it can change as
a result of purposive strategy, or on occasion it
may change accidentally. Whether purposive or
accidental, a common means through which a
firm's center of gravity is changed is when a
firm acquires companies in different industries.
Otherwise, the change is slow, difficult, and may
never occur. For example, firms may integrate
vertically by purchasing upstream or downstream
businesses with the intent of placing emphases
on these operations to change the center of
gravity. On the other hand, a strategic shift may
occur unexpectedly as a result of a merger. This
may take place, for example, when the acquired
firm becomes dominant over time because of
excellent performance, thereby increasing its
power with stockholders.
Changes in the center of gravity create a
problem for top management in their efforts to
manage successfully. Top-level managers often
have strong knowledge of their firm's original
35
center of gravity but may not have a good
understanding of the operations of the new center
of gravity. As a result, they may perceive a need
to institute a new form of control system, one
that is based more on objective performance
indicators as opposed to more subjective assessments of actions that have been taken. This shift
in control systems, as discussed later, can affect
managerial commitment to innovation.
In total, there appears to be some degree of
conflict regarding the effect of diversification on
managerial commitment to innovation. Although
a number of theoretical and methodological
explanations may exist for this conflict, the
arguments noted above suggest that control
systems are a likely moderator of this relationship.
For instance, although highly diversified firms
may be able to better utilize serendipitous
innovations, the market may not value these
firms investing heavily in R&D (Hoskisson and
Hitt, 1988). This lack of perceived value occurs
because the financial controls required with high
levels of diversification (Dundas and Richardson,
1982) create managerial risk aversion (Hayes and
Abernathy, 1980). Furthermore, specific industry
requirements may become 'blurred' for corporatelevel executives in highly diversified firms because
with diversifying acquisitions there is a loss of
strategic control.
The evidence discussed above suggests the
following hypothesis:
Hypothesis 4: There is a negative relationship
between the acquiring firm's level of diversification and managerial commitment to innovation, through a change in control system.
The effects of diversification on managerial
commitment to innovation occur because of the
set of organizational conditions created to help
manage the firms effectively as they become
more diversified. In particular, the relationships
posed are based largely on the type of control
systems utilized (see Figure 1).
Strategic corltrols
In dominant business (that is, less diversified)
firms, corporate executives are able to evaluate
the plans and intended actions of business unit
managers using strategic criteria. However, it is
36
M . A. Hitt, R. E. Hoskisson and R. D. Ireland
increasingly difficult for these managers to process
effectively the volume of information they receive
as the firm becomes more diversified (Hill and
Hoskisson, 1987). With increased diversification,
corporate executives' spans of control increase.
To manage larger spans of control, corporate
executives increasingly have employed portfolio
techniques. Although portfolio techniques are
relatively sophisticated, they result in an allocation of resources based primarily on sources
and uses of cash rather than strategic criteria
(Hamermesh, 1986; Porter, 1985). These are
important criteria for evaluating managerial performance; however, they do not yield the richness
of information necessary to evaluate and allocate
resources based on robust competitive information. In fact, Haspeslagh (1982) found that,
in practice, portfolio techniques often result in
the allocation of resources based on a costefficiency criterion. Such allocation patterns foster
a bias toward short-term operational efficiency.
Lecraw (1984) suggested that executives in highly
diversified (e.g. unrelated business) firms often
make decisions regarding how resources should
be allocated that do not maximize the firm's
competitive performance. If business unit managers believe that resources will be allocated
primarily in terms of short-term criteria, they will
be less likely to invest heavily in R&D (Baysinger
and Hoskisson, 1989).
The M-form has not only allowed top-level
managers to manage broader spans of control, it
has also created a separation between corporateand operational-level decision-making processes.
Ellsworth (1983) suggests that this separation
results in corporate managers using external
capital market rating criteria (e.g. bond ratings)
instead of strategic criteria. These external criteria
tend to be used because top-level managers lack
the product market knowledge required to apply
strategic criteria successfully. Thus, as an M-form
firm becomes more diversified, two conditions
result. First, the horizontal, managerial span of
control increases. Second, the vertical separation
from knowledge associated with operational
decision-making increases. These outcomes suggest that overall strategic control becomes limited
as a firm's degree of diversification increases.
This evidence suggests the following hypotheses:
Hypothesis 4a: There is a negative relatiorlship
between the use of strategic corltrols by corporate
executives (to evaluate division managers' performarlce and on which to base resource
allocations) and marzagerial commitment to
innovation.
Hypothesis 4b: There is a positive relationship
between the use of strategic controls and
managerial committnetlt to itrnovation. Thus,
a reduction in the use of strategic corltrols
produces lower managerial commitment to
innovation.
Firlarlcial controls
In more diversified M-form firms (e.g. relatedlinked and unrelated business firms), there is a
trade-off in the emphasis between strategic and
financial controls (Hoskisson and Hitt, 1988). In
the M-form the decentralization of operating
responsibility is accompanied by centralized
financial controls that are used to allocate
resources. Hoskisson et al. (1989) suggested that
the financial controls applied in M-form firms
tend to produce shortened time horizons and
risk-aversion for the division (or business unit)
managers. Often, these managers are evaluated
on standard 'return on investment' criteria, with
managerial rewards contingent on these criteria.
In large diversified firms, top-level managers
rarely have an effective working knowledge of
their multiple businesses. As such, they rely
almost exclusively on financial results for evaluation of business unit manager performance.
Rappaport (1978) and Hayes and Abernathy
(1980) argued that a focus on short-term financial
results has caused a lower commitment to
innovation, resulting in fewer allocations to
research and development. In turn, this has
contributed to a competitive crisis for many firms
in the United States. Hayes and Abernathy
(1980) suggested that this is evidenced by
U.S. managers' preference for servicing existing
markets rather than creating new ones. For
example, Business Week (1985a,b; 1987) proposed
that GE's acquisition of the RCA Corporation
allowed G E to remain in relatively safe and
established domestic markets rather than pursuing
leading-edge product innovations. An outcome
associated with this type of acquisition was a
reduction in GE's allocations to R&D. During
1987, GE spent approximately $300 million less
on R&D as compared to the previous year (Clark
and Malabre, 1988).
Mergers a n d Acquisitions a n d Managerial C o m m i t m e n t t o Innovation
A second result of a focus on short-term
financial evaluation criteria is that business unit
managers become more risk-averse. In contrast
to top-level executives, business unit managers
cannot diversify their employment risk. Therefore, proposing risky investments (e.g. in R & D )
places the business unit manager's future earnings
at risk. Because financial performance outcomes
are a function of managerial behavior, as well as
a variety of casual factors beyond management
control, financial incentives based on outcome
performance shift some of the risk of the firm
to the business unit manager (Eisenhardt, 1985)
and lead to increased managerial risk aversion.
Furthermore, Yarrow (1973) suggested that those
who are successful in being promoted to toplevel management positions receive promotions
partially because they have been cautious o r
risk-averse. In light of this outcome, business
unit managers prefer less risky investments
with predictable returns (the outcomes that
result from these preferences are suggested in
Figure 1).
These findings suggest the following hypotheses:
Hypothesis 4c: There is a positive relationship
between diversification and the use of financial
controls by corporate executives (to evaluate
division managers' performance and on which
to base resource allocations).
Hypothesis 4d: The use of financial corltrols
in diversified, acquisitive M-form firms is
negatively related to business unit managers'
commitment to innovation (because they produce a short-term orientation and managerial
risk aversion).
Acquisitions d o not always result in a greater
degree of diversification. Because of this, other
variables may interact to affect managerial
commitment to innovation in firms growing
through mergers and acquisitions. Among the
most significant of these variables is firm size.
Firm size
Schumpeter (1961) hypothesized that large firms
are more innovative than small firms. Large
organizations often have more sustained and
efficient R & D programs as compared to small
ones. Larger size is a natural outcome of an
37
acquisition. Thus, according to the Schumpeterian
hypothesis, acquisitions should, over time, result
in greater amounts of innovation. H e argued that
economies of scale in R & D activities allowed
large companies to be more efficient in the
development of innovation, resulting in the
production of more innovative output for a lower
investment. Furthermore, researchers working in
large organizations should be more productive,
because they have a greater number of research
colleagues with whom to interact and discuss
ideas, creating the possibility that greater specialization might be achieved among the researchers
as well. Additionally, a large firm should have
greater ability to 'exploit' innovative ideas; that
is, the firm's ability to produce and market new
innovations is due to the likelihood of higher
market power. Finally, large firms should be able
t o assume greater levels of risk as compared to
small firms, suggesting a positive relationship
between firm size and amount of innovation.
Analysis of the Schumpeterian hypothesis
Research results d o not support fully the Schumpeterian hypothesis. For example, Horowitz
(1962) and Hamburg (1966) found only weak,
positive relationships between R & D intensity and
firm size. Mansfield (1971) discovered that
maximum innovative output occurred at about
the size of the sixth-largest firm in the petroleum
and coal industries; however, very small firms
were found to be the most innovative in the steel
industry. Smith (1974) reported that the largest
firms in the electric power industry did not invest
relatively more in R & D than did smaller firms,
and that intermediate-size firms were the most
R & D intense. Schmookler (1972) discovered that
the largest firms spent almost twice as much on
R & D per patent as did the smallest firms. Thus,
economies of scale in R & D may not necessarily
exist for large organizations. Schmookler (1972)
also suggested that small commercial firms utilize
a greater proportion of their patents than d o
large firms. Thus, large firms may not exploit
innovative ideas effectively (as was argued by
Schumpeter). Link (1978, 1980) found that,
beyond some level, size is not necessarily
conducive to R & D . Finally, Tassey's (1983)
results, showing that beyond a threshold level
firm size does not provide an advantage for
innovative output, support Link's findings. Per-
38
M . A. Hitt, R. E. Hoskisson and R. D. Ireland
haps this inverted U-shaped relationship provides
at least a partial explanation for Bettis's and
Prahalad's (1983) findings that the proportion of
funds allocated to new product investments was
not highly related to size.
Causes of the relationship between size and
innovation
Several arguments describing the reported
inverted U-shaped relationship between firm size
and innovation appear in the literature. Collier
(1983) suggested that, as firms grow larger, they
often mature simultaneously. With increasing
levels of maturity, firms tend to become more
formalized and the rate of technological change
slows. Dougherty (1979) argued that large firms
have significant discretionary economic power
but often use it to reduce, rather than promote,
the development and implementation of new
technology. Hannan and Freeman (1984) proposed that, up to some threshold level, organizations tend to be reasonably flexible and responsive. Beyond that point, however, higher levels
of inertia are encountered, leading to the
conclusion that large size creates inertia. Mansfield (1983) found that large firms conduct a
disproportionately low amount of risky researchthe kind of research that is designed to result in
the development of entirely new products and
processes. Thus, one may conclude that large
firms are risk-averse rather than risk-taking (in
contrast to Schumpeter's arguments). Additionally, as compared to new firms, large companies
may have a great deal of investment in and
commitment to their existing technology, making
it more difficult for them to develop a strong
commitment to change their technology. Because
large organizations are difficult to manage,
control systems are developed to assist managers
in this complex task. These control systems,
which are linked to the structure designed and
employed to aid strategy implementation, often
result in risk-averse managerial behaviors.
This line of reasoning fits Williamson's (1975)
explanation. He argued that large multidivisional
firms are not efficient in the development of
innovations. Rather, these firms are more efficient
in the manufacture and distribution of new
products to the marketplace. Smaller, entrepreneurial firms, he suggested, are more efficient at
developing innovation, but are less efficient in
the manufacture and distribution of new products
to the marketplace. The efficiency of smaller
firms is linked to their ability to provide a flexible
structure and a more hospitable environment for
innovative endeavors. Kamien and Schwartz
(1982) argued that large firms develop bureaucratic structures with multiple rules, creating
a less hospitable environment for innovative
endeavors. They also noted that top technical
talent is attracted to smaller firms where greater
latitude in research work is permitted, and in
some cases encouraged. Furthermore, larger
companies may find it difficult to define problems
requiring solutions. In light of this evidence,
Kamien and Schwartz (1982) concluded that, up
to some point, both R&D intensity (i.e. R&D
expenditures divided by sales) and inventive
activity increase proportionately with firm size,
but then decrease thereafter.
The general effects of size on innovation are
shown in Figure 2. As depicted there, the positive
effects on innovation of economies of scale,
specialization, quality colleagues, and the ability
to exploit opportunities increase rapidly, up to
some point, but eventually level off (see curve
A). In contrast, the effects of commitment to
existing technology and increasing formalization
remain relatively stable, to some point, but then
begin to have increasingly negative effects (e.g.
increases
in
turnover
among
talented
researchers). The reduction in innovation output
is most likely related to the increasing formalization of the work environment (Ettlie, Bridges,
and O'Keefe, 1984; Hlavacek and Thompson,
1973, 1978)-see
curve B-and
the resulting
decrease in managerial commitment to innovation. These effects result in an inverted Ushaped relationship between size and innovation,
as indicated by curve C in Figure 2.
The relationship among size, formal behavioral
controls, and managerial commitment to innovation is shown in Figure 1. The negative
relationship between formal behavioral controls
and managerial commitment to innovation is
displayed in curve C (after point X) in Figure 2.
Prior to point X, emphasis is placed on the use
of informal behavioral controls. After point X,
further increases in size produce greater formal
behavioral controls which, in turn, reduce managerial commitment to innovation. Therefore, the
literature suggests the following hypothesis:
Mergers and Acquisitions and Managerial Commitment t o Innovation
Size
39
x
Quality Colleagues, Ability to Exploit Opportunities
and Increasing Formalization Overall Effects Figure 2. Effects of size on innovation
Hypothesis 5: There is an inverted U-shaped
relationship between firm size and managerial
committner~tto innovation through a change in
cot1fro1 systems.
The control systems change with increasing size
and the new control systems produce negative
effects on managerial commitment to innovation.
Thus, the effects of size on managerial commitment to innovation are based on the organizational conditions created.
Formal behavioral controls
In smaller firms, corporate executives are able
to use informal supervisory and behavioral
controls to monitor and evaluate managerial
actions. However, with increasing size that often
results from additional diversification, more
formal supervisory and behavioral controls are
required. These bureaucratic controls become
necessary for several reasons. As firms grow,
top-level managers' spans of control increase. In
turn, authority and responsibility are decentralized to lower-level managers, resulting in an
increased number of managerial levels. An
outcome of multiple levels of managers can be
additional structural complexity (Mintzberg, 1979;
Khandwalla, 1978).
Bureaucratic controls result in more rigid and
standardized managerial behavior that, in turn,
contributes to organizational inertia (Romanelli
and Tushman, 1986; Hannan and Freeman,
1984) and reduced managerial commitment to
innovation (Hlavacek and Thompson, 1973,
1978). For example, Ettlie et al. (1984) found
that centralized decision-making was necessary
for radical innovations to be adopted. They
found that decentralization produced incremental
innovations and that strong support from toplevel managers was necessary to initiate and
implement radical innovations. Therefore, structural elaboration may result in safer (less radical)
approaches to innovation.
With acquisitions, the acquired firm must be
integrated into the acquiring firm's control
systems. In large, dominant or related business
firms, the acquired firm often is required to adopt
centralized bureaucratic controls. However, in
large unrelated business firms the acquired firm
40
M . A. Hitt, R. E. Hoskisson a n d R. D. Ireland
may be allowed to use its existing bureaucratic
controls because of the diversity of operations
among and across the various business units.
As noted earlier, acquisitions result in larger
organizations. Ettlie et al. (1984) found that
larger organizations promoted more structural
complexity, formalization, and decentralization
which were negatively related to new product
introductions. Furthermore, larger firms tend to
adopt other control devices, such as centralized
and cumbersome review procedures, when implementing investments in new projects (Loescher,
1984). These controls discourage managerial
commitment to innovation (see Figure 1).
The results reported in the literature suggest
the following hypotheses:
Hypothesis 5a: There is a positive relationship
between firm size and the adoption of bureaucratic control procedures after firm size reaches
a point where efjiciency concerns offset economies of scale.
Hypothesis 56: There is a negative relationship
between the use of bureaucratic control procedures and managerial commitmetlt to innovation.
Summary
Table 1 summarizes the hypothesized relationships among size, diversification, and organizational controls. As noted in the table, with
increasing levels of diversification, managers
make a trade-off in their emphasis between
strategic controls and financial controls. With
increasing size, managerial behavior and procedural controls become more formal. Also,
there is an interaction effect between increasing
diversification and increasing size on the set of
organizational controls that are used. For
instance, a small dominant business firm, such
as Nucor Steel, would fit in the lower left portion
of Table 1. Nucor Steel emphasizes strategic
controls. In a simultaneous fashion, however,
adequate financial controls are maintained and
managers use informal behavioral controls. These
informal behavioral controls are operationalized
through monthly strategy meetings with business
unit managers. But as organizations such as
Nucor become more diversified (both in product
and geographic diversity), additional financial
Table 1. Primary control emphases by size and
diversification
Size
Diversification
Dominant
Larger
Strategic
controls
Formal
behavioral
controls
Smaller Strategic
controls
Informal
behavioral
controls
Related
Unrelated
Strategic1
financial
controls
Formal
behavioral
controls
Financial
controls
Strategic1
financial
controls
Informal
behavioral
controls
Financial
controls
Decentralized
formal
behavioral
controls
Decentralized
informal
behavioral
controls
controls are traded off for less strategic control.
Furthermore, more formal budgetary and review
procedures (bureaucratic controls) are required
with larger size.
DISCUSSION
The research literature suggests that merged firms
may not perform as well over time as firms not
involved in acquisitions. There are multiple
reasons for these outcomes. This paper has
focused on one of these reasons-the
effects
of acquisitions on managerial commitment to
innovation. Evidence suggests that acquisitions
affect R&D investment through the process of
making acquisitions and because of a firm's size
and its level of diversification that result from
mergers and acquisitions. Acquisitions often serve
as a substitute for innovation and for increasing
levels of debt to finance them. In addition, the
process of making acquisitions (e.g. searching for
candidates, negotiation, and so forth) absorbs
significant amounts of managerial energy and
attention. Recent experiences at RJR Nabisco
Inc. suggested that significant amounts of managerial energy were absorbed by a type of
acquisition-related activity (in this case the
leveraged buyout of RJR Nabisco by KKR).
Mergers and Acquisitions and Managerial Commitment to Innovation
Specifically, this process resulted in the spreading
of rumors and the creation of uncertainty for
employees, many of whom were reported to be
quite angry with top-level executives. Large
amounts of time were required in order for
executives to address these issues and concerns
(Helyar, 1988).
With increasing diversification it is necessary
for managers to make trade-offs between strategic
controls and financial controls. Consequently, in
highly diversified firms, financial controls are
emphasized. This emphasis is necessary because
financial controls allow top-level managers to
cope successfully with the amount of information
that they must process. However, financial
controls cause business unit managers to focus
on the short term and to become more riskaverse, thereby reducing their commitment to
innovation.
With increasing organizational size, trade-offs
between informal and more formalized behavioral
controls are made. Increased formalization creates more structured employee responses to
various situations. These responses often produce
cumbersome review procedures for managerial
investment in new projects. Over time these
bureaucratic controls likely have a negative
influence on the culture supporting innovative
activity (Kerr and Slocum, 1987; Ouchi, 1979)
and cause managers to reduce their commitment
to innovation.
Acquisitions can create a form of technological
myopia with an emphasis on short-term results
(Wyman, 1985). It has been argued (e.g. Clark
and Malabre, 1988) that an emphasis on shortterm results has contributed to a reduction in
basic research expenditures in U.S. industry. This
situation is particularly worrisome, given that
basic research is critical to many firms' long-run
health. It has been estimated that roughly 3
percent of today's R&D outlays are devoted to
basic research. The percentage has declined from
5.4 percent in 1979 (Clark and Malabre, 1988).
Of additional importance is the fact that
acquisitions often require substantial resources,
either to finance the acquisitions or to fend off
unfriendly takeovers. In both instances the net
outcome is a diversion of resources from internal
development activities. Thus, over time, acquisitions may reduce organizations' ability to
compete successfully in both domestic and international markets. Some (e.g. John Young,
41
President of Hewlett-Packard) have suggested
that U.S. industry must expand its R&D efforts
if it is to be competitive in the global marketplace.
Of concern to John Young is the fact that nondefense R&D outlays in the U.S., as a percentage
of overall economic activity, fall significantly
below outlays in Japan and West Germany (Clark
and Malabre, 1988). As shown in the feedback
loop of Figure 1, this entire process tends to be
self-reinforcing. In other words, a reduction in
managers' commitment to innovation increases
the incentives to acquire other firms and to
diversify operations through those acquisitions.
In this manner, a self-reinforcing cycle evolves.
In the 1980s a number of diversified firms
have been restructuring and downsizing through
divestment of companies acquired previously.
Under Jack Welch's leadership at GE, for
example, operations valued at $9 billion have
been divested while operations worth at least
$16 billion have been added. This massive
restructuring effort, which resulted in the elimination of over 100,000 jobs (roughly one-fourth
of GE's workforce), has created a company that
differs significantly from its past (Sherman, 1989).
G E now is organized around only 14 distinct
businesses (included among these businesses are
NBC television, medical systems, aircraft engines,
and financial services) (Tichy and Charan, 1989).
In theory, divestments of unrelated businesses
should result in increased managerial commitment
to innovation. If a firm's remaining businesses
are more related to the original core business (one
that is well understood by top-level managers), a
greater emphasis on strategic controls may result.
When strategic controls are applied, corporate
executives are more likely to focus on long-term
projects, and business unit managers are more
likely to accept at least measured risk. Measured
risk will be accepted by business unit managers
because their project proposals will likely be
judged on a priori strategic criteria and not solely
on post-hoe financial outcomes. In such instances
the risk of failure is shared by business unit and
corporate-level executives. These outcomes are
consistent with Lubatkin's (1988) arguments that
mergers between related firms create value.
However, not all restructuring necessarily
creates a set of core businesses about which
top-level managers have strong operating and
competitive knowledge. For example, because of
market considerations or value, a firm may divest
42
M . A . Hitt, R. E. Hoskisson and R. D. Ireland
its original core business (as in the cases of
National .Distillers, American Can-now Primerica, and Tenneco). When this occurs the remaining businesses may be more related, but corporate
executives could still find it difficult to apply
strategic controls unless they are able to develop
an improved operating knowledge of those
businesses. Furthermore, reductions in organizational size, achieved through divestment, and
the creation of greater relatedness are likely to
increase the centralization of formal behavioral
controls (Mintzberg, 1979), at least in the
short term. In turn, centralized and formalized
behavioral controls result in standardized
behavior across divisions. No reduction in formalized behavioral controls would be realized until
size reductions passed some threshold point.
Restructuring and divestment often occur to
actuate a turnaround. However, the purpose of
such a turnaround may produce different effects
on managerial commitment to innovation. If a
firm is attempting to effect a strategic turnaround
(i.e. develop a set of businesses among which
there are greater relationships), the likelihood
that strategic controls will be implemented is
greater (Hofer, 1980). However, in a firm
attempting to effect an operating turnaround
(achieved through an emphasis on cost reductions,
for example), managers are more likely to focus
on short-term financial results. In fact, Hambrick
(1985) noted that a common means of effecting
a turnaround is through cost reductions and
financial controls. In these situations he explained
that common areas targeted for reductions
included R&D, advertising, inventory, and managerial pay. As a consequence, strong financial
controls are utilized.
Clearly, other variables, such as the purpose
for restructuring (described above), may affect
managerial commitment to innovation. However,
research indicates that the processes associated
with acquisitions, the level of diversification, and
firm size may be dominant influences. Some of
these influences result because of the effect of a
firm's size and its level of diversification on the
controls used. Philip Morris's acquisition of Kraft
Inc. is an interesting example of this phenomenon.
Philip Morris is recognized as a master of line
extensions (whereby a firm introduces variations
of existing products-methol,
king, and slim
cigarettes, for example) and for its marketing
prowess). However, the company is not known
for its ability to introduce bold new products to
various marketplaces. In fact, some fear that the
size created through the merging of Kraft
with General Foods (an earlier Philip Morris
acquisition) will result in a parade of 'new and
improved7versions of yesteryear's products rather
than the introduction of new products (Freedman
and Gibson, 1988).
In this regard, one other issue deserves
examination. As noted earlier, the focus in this
paper has been on the effect of mergers and
acquisitions on managerial commitment to innovation. However, firms might experience a
reduction in managerial commitment to innovation if innovation resulting from internal
developments increases the firm's size and diversification. However, the strength of these reductions
would not be as great as those encountered when
increased size and diversification occur because
of mergers and acquisitions. First, the amount of
managerial energy absorbed may not be less, but
managers' energies will likely be focused on
strategic control issues related to the core
business. Thus, energy absorbed may even foster,
or at least not deter, commitment to innovation
when increased size and diversification occur
through internal development.
Furthermore, additional growth and increased
diversification achieved through internal developments typically do not require the firm to
increase significantly its debt level. When internal
development leads to significant growth requiring
financing beyond retained earnings, stock issues
or bonds may be used. In both cases, specifying
strategies in the prospectus to potential stockholders or bondholders may be necessary. Many
firms pursuing internal development maintain
secrecy regarding new developments in order to
achieve a competitive advantage, and thus may
avoid external financing. Therefore, pursuit of
internal development is likely to require slowerpaced growth that does not necessitate external
financing (Biggadike, 1979).
Additionally, diversification through internal
development is not common. Most successful
innovations that were developed internally are
those related to firms' current product lines.
Innovations unrelated to a firm's current product
line may require substantial resources for development of large scale manufacturing and distribution
facilities. Such resource commitments may be
discouraged in firms pursuing internal develop-
Mergers and Acquisitions and Managerial Commitment to Innovation
ment (Burgelman, 1983). Also, cultural attributes
are likely to be more important in firms that
emphasize internal development because it is
necessary to encourage support for new ideas
(Kerr and Slocum, 1987; Ouchi, 1979). Thus,
although substantial increases in size and diversification, achieved through internal development,
may ultimately discourage managerial commitment to innovation, it is much more likely that
reductions in commitments to innovation will
occur through external acquisition.
RESEARCH AND CONCLUSIONS
Empirical research is required t o investigate all
of the critical research questions-including the
final, more speculative issue-that
have been
posed in this paper. Despite the importance of the
primary topic examined herein, a comprehensive
review of the research prepared for the National
Science Foundation by Charles River Associates
uncovered only a small amount of work concerned
with the direct link between merger and acquisition activity and commitment to innovation.
They concluded that 'there is no theoretical o r
unambiguous empirical evidence in the economics
and business literature . . . that mergers have
significant direct effects, positive o r negative,
upon the level, composition, or productivity of
R & D activity' (Charles River Associates, 1987:
40). Thus, the work reported herein is a
theoretical contribution to the literature examining this relationship.
The important relationship between mergers
and acquisitions and investments in R & D was
examined in two recent studies. Hitt, Hoskisson,
Ireland and Harrison (1989) found that acquisitions had a negative effect on R & D intensity
at the corporate level. Although firms increased
their R & D intensity following acquisitions in a
sample of 191 acquisitions, this increase was
due primarily to industry increases in R & D
expenditures. Those firms pursuing growth
through acquisition were less R&D-intensive than
their industry counterparts. Hitt et al.'s (1989)
findings also provided evidence that higher debt,
larger size, and greater diversification contributed
to the lower level of relative R & D intensity in
acquisitive growth firms.
A study by Hall (1988) reported no evidence
of reduced R & D investment for firms engaging
43
in acquisitive growth. The Hall study, however,
did not control for several variables (e.g. diversification, leverage) found to be critical by Hitt et
al. (1989) and suggested to be important herein
(e.g. control systems). Nonetheless, her findings
indicated that acquisitions often involved firms
in mature industries where R & D expenditures
may not play a critical role.
The results of these two studies (Hitt et al.,
1989; Hall, 1988) may suggest that firms pursuing
growth through acquisition reduce their commitment to innovation by purchasing businesses in
less R&D-intensive environments. Furthermore,
this supports the argument that firms use acquisitions as a substitute for innovation since they
can move into markets that are new to the firm
but that d o not require innovation. This outcome
is even more likely as a firm completes more
acquisitions (see the feedback loop in Figure 1).
Another study that is related indirectly to this
research stream examined R & D intensity before
and after restructuring (Hoskisson and Johnson,
1989). Hoskisson and Johnson found that restructuring firms increased their level of R & D intensity
in the post-restructuring period (controlling for
size, industry R & D expenditures, debt, ownership
concentration, and current liquidity). In addition,
findings suggested that firms typically reduce their
level of diversification in the post-restructuring
period. A s Figure 1 proposes, a reduced level of
diversification may lead to greater use of strategic
controls, thereby increasing managerial commitment to innovation. Restructuring may be a way
of overcoming the feedback loop from managerial
commitment t o innovation that leads to further
acquisition activity (see Figure 1). Another
study (Amit, Livnatt, and Zarowin, 1989) also
supported that feedback loop shown in Figure 1.
Their results indicated that the greater the
proportion of assets purchased through acquisitions the more desirable it became to expand
through acquisitions rather than through capital
expenditures.
In summary, the recent research seems to support
the model proposed herein. The results of these
studies suggest that firms engaging in acquisition
activity may reduce their commitment to innovation
(as measured by R & D intensity). Repeated activity
further reduces managers' commitment to innovation and may lead to acquisitions of firms
in non-R&D-intense industries, thereby avoiding
innovation (Constable, 1986).
44
M . A . Hitt, R. E. Hoskisson and R. D. Ireland
Although these few studies cited above represent a partial test of the model presented in
this paper, additional research is required. The
findings described briefly above indicate some
correspondence to the model in that acquisition
activity, diversification, and debt appear to affect
managerial commitment to innovation. However,
acquisitions, as a substitute for innovation,
managerial energy absorption, and a test of
whether reduced commitment to innovation
increases acquisition activity (feedback loop)
should be addressed more directly in future
empirical work. Also, direct field studies measuring the control system effects require formulation
and execution.
Furthermore, although R & D intensity is a
useful archival measure of managerial commitment to innovation, R & D expenditures do
not fully represent the level of managerial
commitment to innovation. It is anticipated that
more sophisticated field indicators of commitment
to innovation will be found through the conduct
of field studies of both product and process
initiatives. Therefore, in addition to archival
measures, we propose that field research be
developed to measure managerial commitment
to innovation. Additionally, as suggested above,
future field research should use direct measures
of control system attributes as well as process
issues such as managerial energy absorption.
Future research should also examine alternative
strategies to acquisitions and internal development. For example, we should study the conditions under which joint ventures and the
purchase of innovation from external sources
become attractive alternatives.
Of course, acquisitions may be undertaken
without an intent to affect commitment t o
innovation. As Fowler and Schmidt's (1989) work
suggested, some firms, as compared to others,
may be superior at the acquisition process because
of previous experience. Other firms may find the
acquisition process necessary to compete in a
globalizing economy (Ghosal, 1987). However,
the acquisition process, the issues of experience
and justification notwithstanding, involves tradeoffs (such as changes in managerial commitment
to innovation) that should be recognized and
evaluated carefully. Clearly, the results of all the
studies proposed herein could have significant
implications for top-level managers and the
current emphasis on acquisition activity in corporate America.
ACKNOWLEDGEMENTS
We are indebted to Jay Barney, Barry Baysinger,
Rita Kosnik and Tom Turk for their suggestions
on earlier drafts of this manuscript.
REFERENCES
Amihud, Y. and B. Lev. 'Risk reduction as a
managerial motive for conglomerate mergers', Bell
Journal of Econotnics, 12, 1981, pp. 605-617.
Amit, R . , J. Livnatt and P. Zarowin. 'The mode of
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Mergers and Acquisitions and Managerial Commitment to Innovation in M-Form Firms
Michael A. Hitt; Robert E. Hoskisson; R. Duane Ireland
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Transaction Cost Analysis of Strategy-Structure Choice
Gareth R. Jones; Charles W. L. Hill
Strategic Management Journal, Vol. 9, No. 2. (Mar. - Apr., 1988), pp. 159-172.
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Mode of Corporate Diversification and Economic Performance
Bruce T. Lamont; Carl R. Anderson
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Diversification Strategy and Performance
Donald J. Lecraw
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Merger Strategies and Capital Market Risk
Michael Lubatkin; Hugh M. O'Neill
The Academy of Management Journal, Vol. 30, No. 4. (Dec., 1987), pp. 665-684.
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R & D and the Directions of Diversification
James M. MacDonald
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Composition of R and D Expenditures: Relationship to Size of Firm, Concentration, and
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Edwin Mansfield
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Mergers and Market Share
Dennis C. Mueller
The Review of Economics and Statistics, Vol. 67, No. 2. (May, 1985), pp. 259-267.
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A Conceptual Framework for the Design of Organizational Control Mechanisms
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Strategies and Structures for Diversification
Robert A. Pitts
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The Hubris Hypothesis of Corporate Takeovers
Richard Roll
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Inertia, Environments, and Strategic Choice: A Quasi-Experimental Design for
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Elaine Romanelli; Michael L. Tushman
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Firm Size, Market Structure, Opportunity, and the Output of Patented Inventions
F. M. Scherer
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Strategic Business Fits and Corporate Acquisition: Empirical Evidence
Lois M. Shelton
Strategic Management Journal, Vol. 9, No. 3. (May - Jun., 1988), pp. 279-287.
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Technological Innovation in Electric Power Generation: 1950-1970
Bruce A. Smith
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Bankruptcy, Secured Debt, and Optimal Capital Structure: Comment
Clifford W. Smith, Jr.; Jerold B. Warner
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The Role of Market Structure in Merger Behavior
John F. Stewart; Robert S. Harris; Willard T. Carleton
The Journal of Industrial Economics, Vol. 32, No. 3. (Mar., 1984), pp. 293-312.
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Doing a Deal: Merger and Acquisition Negotiations and Their Impact Upon Target Company
Top Management Turnover
James P. Walsh
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Corporate Finance and Corporate Governance
Oliver E. Williamson
The Journal of Finance, Vol. 43, No. 3, Papers and Proceedings of the Forty-Seventh Annual
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Managerial Utility Maximization under Uncertainty
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